Aug. 1 (Bloomberg) -- Hedge-fund managers following the path of George Soros, who made a fortune by exploiting financial turmoil, are beating their peers for the first time since 2003 on wagers the global economy won't improve anytime soon.
Clarium LP, the San Francisco-based hedge fund run by Peter Thiel, gained 47 percent this year as of July 25 on trades that paid off when stocks and the U.S. dollar fell, according to two of his investors. Alan Howard's Brevan Howard Fund Ltd. rose almost 18 percent, helped by holdings that profited as the Federal Reserve cut interest rates seven times since September to keep the U.S. out of a recession, according to monthly shareholder reports.
``Macro investors are torn between two views: We're in something like the 1970s or we're in something like the 1930s,'' said Christopher Watling, head of London-based research firm Longview Economics, referring to the two worst periods of economic pain in the last century.
Macro funds, which can trade everything from Apple Computer Inc. shares to zinc futures, returned 18.8 percent in the 12 months ended in June, five times the industry average and the most of any strategy, according to indexes compiled by New York- based Credit Suisse Tremont Index LLC. While two of their favorite trades -- betting financial stocks will fall and oil will rise -- turned unprofitable last month, the best-performing funds expect the bad news to continue.
Oil to Yen
Thiel, who founded Clarium in 2002 after helping sell online-payments service PayPal to EBay Inc. for $1.5 billion, has said oil prices could hit $200 a barrel by the end of the year. Yet the 40-year-old has unwound his position because of concerns that policy makers will do whatever is necessary to drive down the price to combat inflation, said the investors, who declined to be identified because the fund is private.
The Federal Reserve has taken the unprecedented steps this year of committing to pump $350 billion of cash and securities into the banking system and extending its emergency-lending programs to Wall Street firms.
Clarium, which oversees $7.4 billion, is positioned to profit from declines in U.S. stock prices and the dollar, particularly against the yen, the investors said. Thiel, who declined to comment, also expects 30-year Treasuries to rise as the U.S. moves closer to deflation, or an extended period of falling prices.
Howard, who founded his London-based firm in 2002 after leaving his job as head of proprietary interest-rate trading at Credit Suisse Group AG, correctly predicted that the difference between short-term and long-term interest rates in the U.S. would increase, as the Federal Reserve was forced to lower its benchmark rate by 2.25 percentage points to 2 percent to battle a slowing economy. He also made money on commodities and in emerging markets.
Macro Pioneer
Unlike Thiel, Howard, 44, is expecting stagflation, or economic stagnation coupled with an increase in prices, in the U.S., Europe and Japan, according to Brevan Howard's latest monthly shareholder report.
``The world continues to go through a period of adjustment from excess and the mispricing of risk,'' said Ian Plenderleith, chairman of London-based BH Macro Ltd., the publicly traded fund that invests in Brevan Howard's macro portfolio. ``I don't think that it would be remotely possible to say that this is coming to an end.''
Soros, who turns 78 this month, is the grandfather of macro investing, which seeks to profit from macroeconomic trends by trading currencies, bonds, stocks and commodities. The New York- based billionaire earned worldwide renown in 1992 for making $1 billion breaking the Bank of England's defense of the pound. He also profited from German reunification in 1990 and last year made 31 percent investing in India and China.
Tudor Jones
``Global macro is a good place to allocate assets if you are concerned about the health of the equity market,'' said Scott Baker, principal at Greenwich, Connecticut-based Cook Pine Capital LLC, which constructs hedge-fund portfolios for wealthy clients. ``They afford investors a good strategy in which to weather today's economic storms.''
Managers in the Soros mold who have developed into so- called multistrategy investors are also making money this year, though they aren't matching the returns of Brevan Howard and Clarium. These managers have a macro component to their firms, but also employ other strategies such as fundamental stock- picking.
The $11.1 billion Tudor BVI Global Fund Ltd., run by Paul Tudor Jones from Greenwich, Connecticut, climbed 4.2 percent this year through July 16. New York-based Louis Bacon's Moore Global Investment Fund rose about 2 percent in the same period.
Cost of Optimism
Bruce Kovner, who runs Caxton Associates LLC in New York, was up 3.44 percent as of July 22. Soros's Quantum Endowment Fund, which since 2000 has taken a more conservative investment approach, returned 5.5 percent in the first half of the year.
Officials for the funds declined to comment.
Managers who are the most optimistic about stocks have done the worst. London-based Lansdowne Macro Fund Ltd., overseen by Richard Davidson, has fallen almost 7 percent this year.
Barton Biggs's Traxis Fund LP tumbled 10 percent in the first half of the year, hurt by bets that U.S. shares would appreciate. As recently as May, Biggs, 75, said the U.S. economy will grow in the second half of 2008, the Standard & Poor's 500 Index may climb to a record and commodity prices will retreat as much as 30 percent.
Companies aren't expressing ``gloom and doom,'' and the economy is ``not as bad as you would believe from listening to the press and some of the Wall Street commentators,'' the New York-based Biggs said in a May 5 interview on Bloomberg Television.
Since then, Biggs has modified his view, saying the economy will neither grow nor tumble into recession, according to investors. He predicts the S&P 500 may rise to 1340 or 1350, though the market may retreat again after that.
The benchmark index closed yesterday at 1267.38, down 1 percent in July and 14 percent for the year.
To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net
Last Updated: July 31, 2008 19:01 EDT
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